Inflation Rebound

The national inflation rate jumped to 1.0% in November from 0.1% in October. As Statistics Canada notes, this apparently large increase is “due primarily to gasoline prices.” Specifically, last month’s gasoline prices are being compared to the depressed gasoline prices of November 2008.

Given the changed base of comparison, it is not surprising that the headline inflation rate has returned to solidly positive territory. However, it is worth noting that the overall consumer price level was still lower last month than it had been in September 2008, before the economic crisis. (Where 2002 = 100, September 2008 = 115.7 and November 2009 = 115.2)

The most striking development in today’s release is the drop in core inflation – which excludes gasoline and other volatile items – from 1.8% in October to 1.5% in November. So, apart from the rebound in commodity prices, there is no inflationary trend in the Canadian economy.

The implication is that the Bank of Canada can afford to maintain, or even increase, monetary stimulus without overshooting its 2% inflation target. Similarly, governments can and should press ahead with fiscal stimulus without worrying about stoking excessive inflation.

Recently, currency traders bid up the Canadian dollar partly based on incorrect speculation that the Bank of Canada would follow Australia’s lead in raising interest rates. But this recent lesson has not stopped some analysts from drawing an analogy between Canada and Norway, another resource exporter than hiked interest rates yesterday. Today’s reported drop in the Bank of Canada’s core inflation rate should pour cold water on any speculation about it raising interest rates before mid-2010.

UPDATE (Dec. 18): Quoted in The Toronto Star